Peru Country Profile
General Information
Political Climate
Peru has experienced impressive economic growth in recent years with stable macroeconomic policies, improved investment rules, new labour laws, and privatisation policies that have made the country attractive to foreign investors. Extra effort has been made in the energy sector to attract foreign investment in Peru's mining industry and its fast-growing oil and gas sector. Despite the economic upswing, however, half of Peru's population continues to live in poverty, and unemployment rates are high. While the economy has grown over 8% annually over the past 5 years and inflation has been at low rates for almost 10 years, the last decade has been characterised by an unstable political climate. Efforts to alleviate social and economic inequality and reduce unemployment have been impeded by corruption and by the government's failure to deal successfully with these problems.
President García, who took office in 2006, has seen his popularity fall sharply and has been going through a turbulent time due to a major corruption scandal over oil contracts in October 2008, which forced his entire cabinet to resign. The scandal involves the Norwegian oil company, Discover, which is accused of having bribed officials in order to obtain five oil concessions, accusations that the company denies. In an effort to restore public confidence in his administration, President García appointed Yehude Simon, a leftist regional governor, as the new Prime Minister stating that his first priority is to fight corruption. Peru has witnessed a large number of high-level corruption cases in the past involving high-ranking politicians, the most prominent case being that of ex-President Alberto Fujimori. According to Freedom House 2010 and several newspaper articles, after a decade in power, Fujimori fled to Japan in 2000, taking with him an alleged USD 600 million of national assets. Since his extradition to Peru in 2007, Fujimori has faced four trials on charges of having ordered killings, embezzlement, abuse of power and corruption. He has been found guilty on all charges and sentenced to a total of more than 30 years in prison. His national security advisor, Vladimiro Montesino, has also been involved in corruption scandals and is currently in jail convicted on charges of corruption, murder, arms smuggling and drug dealing. Videos and reports have revealed how Montesino bribed judges, politicians and the news media, and how his network reached deep into the courts, the military, the Congress, the police, and the private sector. In the wake of the Fujimori and Montesino era, approximately 1,800 individuals have been indicted on charges of corruption and abuse of authority, and Peruvians are now highly sensitised to political corruption. In the June 2011 presidential election, the leftist former army officer Ollanta Humala narrowly won Peru's presidency with 51.5% of the vote. Humala has pledged to alleviate poverty in Peru, combat unemployment, and provide Peruvians with a greater share of the country's energy and mineral resources, according to a 2011 article by Associated Press.
Various sources reveal that Peruvian households identify corruption as a major problem. For example, according to an Ipsos Apoyo, Opinión y Mercado May 2009 public opinion poll (in Spanish), corruption and bribery were identified by 39% of the respondents to be among Peru's most serious problems, alongside unemployment, insecurity and poverty. A Proética national opinion survey 2008 (in Spanish) reveals that the vast majority of Peruvians either approve of or tolerate practices such as cheating on income taxes, nepotism among public officials or bribing to avoid a traffic ticket. The same study reveals that 92% of Peruvians who were asked for a bribe did not report it, either because they did not believe it would change anything or because they were afraid of retaliation. As a consequence of this attitude towards corruption, very few Peruvians have confidence in the government's willingness to fight corruption. This is supported by Transparency International's Global Corruption Barometer 2010, in which 84% of the respondents perceive the government's actions against corruption to be 'ineffective'. According to the same report, 22% report having paid a bribe the previous year, while the judiciary is reported to be the most corruption-prone public institution. Critical observers argue that the election of President García is a setback for the fight against corruption in Peru. In his campaign platform, which mainly focused on balancing poverty reduction, fiscal austerity and job creation, there was no mention of fighting corruption. President García himself spent eight years in exile during the Fujimori presidency in order to avoid prosecution on charges of corruption and embezzlement. However, after the Supreme Court voided his arrest warrant, he was able to run for President. Peru's fight against corruption seems to focus primarily on the offences of the Fujimori era and on other high-profile corruption crimes that took place in the past, whereas 'everyday corruption' has not been targeted in the same way. Attempts to combat corruption have been restricted, and many initiatives following the fall of the Fujimori regime have proven unsuccessful or have been abandoned.
Business and Corruption
The business climate in Peru is generally attractive. Foreign trade has been extensively deregulated in recent years, state interference in free trade is minimal and the present government is continuing many of the business-friendly policies of previous governments. The country has a liberal foreign investment regime, and the 1993 Constitution guarantees foreign investors the same treatment as nationals. However, in several surveys, including the Transparency International Global Corruption Barometer 2010 and the World Economic Forum Global Competitiveness Report 2010-2011, corruption is identified as negatively influencing Peru's private sector and as a major obstacle for business operations. The difficulties that companies experience when trying to deal with Peru's extensive bureaucracy has led some companies to make use of facilitation payments or to contract local agents who they hope can expedite business transactions. However, since companies can be held accountable for corrupt behaviour performed by agents on their behalf, they are advised to conduct extensive due diligence when investing in or already doing business in Peru.
According to the World Bank & IFC Enterprise Surveys 2006, 56% of the companies surveyed identify corruption as a major constraint for doing business, while 29% report that they are expected to give gifts in order to obtain an operating licence and 9% report that they are expected to give gifts to secure a government contract. New and small companies are more likely to be asked for bribes than established or larger companies. Bribes are also commonly used by companies when dealing with the judiciary in order to speed up and facilitate judicial proceedings.
According to Bertelsmann Foundation 2010, several obstacles such as corruption and problems dealing with licences have hampered growth of the private sector in Peru. In a survey conducted by Miller & Chevalier Latin America Corruption Survey 2008, 82% of Peruvian business leaders reported to having lost deals due to corrupt practices by competitors, and 73% view corruption as a significant obstacle to doing business in Peru. Furthermore, 23% of the surveyed business leaders believe that corrupt offenders are unlikely to be caught and punished by authorities. Companies should be aware of government procurement processes and that the judicial sectors are susceptible to corruption. According to the US Department of State 2011, private sector groups have increased efforts to fight corruption through Proética, the national chapter of Transparency International in Peru. Companies are generally recommended to use a specialised public procurement due diligence tool in order to mitigate the corruption risks associated with public procurement in Peru.
Regulatory Environment
Although the regulatory environment in Peru has improved in recent years due to a reduction in barriers to trade, faster customs procedures and improved dispute settlement processes, many foreign companies still cite regulatory issues as constraints for their business operations in Peru. According to the World Economic Forum Global Competitiveness Report 2010-2011, the surveyed companies identified inefficient government bureaucracy to be the most problematic factor for doing business in Peru, followed by corruption and restrictive labour regulations. In a similar vein, in Transparency International's Global Corruption Barometer 2010, more than 38% of Peruvian households perceive public officials to be 'extremely corrupt'.
According to the World Bank & IFC Doing Business 2011, a company must go through 7 procedures taking an average of 12 days at a cost of nearly 20% of GNI per capita to start a company in Peru. The public institutions granting relevant business licences suffer from widespread corruption and a deficiency in the rule of law, and according to the US Department of State 2009, companies continue to complain about excessive red tape and confusion about which licences they need and where to obtain them. Surveys reveal that the situation has worsened within some areas of licensing. According to the World Bank & IFC Enterprise Surveys 2006, it took a company 34 days to obtain an operating licence in 2002; by 2006 the number of days had increased to 81. One initiative to improve this situation is the private investment agency ProInversion, established as a 'one-stop shop' advisory agency for current and potential investors. ProInversion has successfully completed both concessions and privatisations of state-owned enterprises and natural resources. Foreign investors are advised to register with ProInversion in order to obtain a guarantee that they will be able to repatriate capital, profits and royalties.
Intellectual property rights are protected in Peru within a legal framework which is consistent with international standards. According to the Bertelsmann Foundation 2010, property rights are also properly defined and protected by law, with the exception of areas inhabited by the indigenous population, where they are not clearly defined. However, according to the US Department of State 2011, legal enforcement is problematic as the judicial system is often very slow to hear cases and court decisions have been difficult to predict and enforce. The competence of individual judges is said to vary substantially, and allegations of corruption and outside interference in the courts are common. The Peruvian appeals process also tends to delay the resolution of cases. Thus, foreign investors have found that contracts are often difficult to enforce in Peru. However, the Peruvian government has taken steps to improve dispute settlement procedures. Between 2004 and 2007, 24 commercial courts were established, with the purpose of ruling on investment disputes, including two courts of appeal, which have substantially improved the process of resolving commercial disputes. The amount of time required to resolve a case has, on average, been reduced from two years to two months, and the enforcement of court decisions has been reduced from 36 months to 3-6 months. Several private organisations operate their own arbitration centres, such as the Universidad Católica, the Lima Chamber of Commerce and the US Chamber of Commerce. Peru has also been a full member of the International Centre for Settlement of Investments Disputes (ICSID) since 1993 and of the New York Convention of 1958 since 1988. Access the Lexadin World Law Guide for a collection of legislation in Peru.
